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Insulation Impossible : Fiscal Spillovers in a Monetary Union

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  • Russell Cooper

    ()
    (University of Texas [Austin] - University of Texas at Austin)

  • Hubert Kempf

    ()
    (EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne, Banque de France - Direction de la Recherche)

  • Dan Peled

    ()
    (University of Haifa - Department of Economics)

Abstract

This paper studies the effects of monetary policy rules in a fiscal federation, such as the European Union. The focus of the analysis is the interaction between the fiscal policy of member countries (regions) and the monetary authority. Each of the countries structures its fiscal policy (spending and taxes) with the interests of its citizens in mind. Ricardian equivalence does not hold due to the presence of monetary frictions, modeled here as reserve requirements. When capital markets art integrated, the fiscal policy of one country influences equilibrium wages and interest rates. Under certain rules, monetary policy may respond to the price variations induced by regional fiscal policies. Depending on the type of rule it adopts, interventions by the monetary authority affect the magnitude and nature of the spillover from regional fiscal policy.

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Paper provided by HAL in its series Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) with number halshs-00497430.

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Date of creation: May 2010
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Handle: RePEc:hal:cesptp:halshs-00497430

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Keywords: Monetary union; inflation tax; seigniorage; monetary rules; public debt.;

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  1. Russell Cooper & Hubert Kempf & Dan Peled, 2008. "Regional debt in monetary unions : is it inflationary ?," Documents de travail du Centre d'Economie de la Sorbonne, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne v08070, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
  2. Scott Freeman & Joseph H. Haslag, 1996. "On the optimality of interest-bearing reserves in economies of overlapping generations (*)," Economic Theory, Springer, Springer, vol. 7(3), pages 557-565.
  3. Charles T. Carlstrom & Timothy S. Fuerst, 1995. "Interest rate rules vs. money growth rules: a welfare comparison in a cash-in-advance economy," Working Paper, Federal Reserve Bank of Cleveland 9504, Federal Reserve Bank of Cleveland.
  4. Chatterjee, Satyajit & Corbae, Dean, 1992. "Endogenous Market Participation and the General Equilibrium Value of Money," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 100(3), pages 615-46, June.
  5. Kehoe, Patrick J., 1987. "Coordination of fiscal policies in a world economy," Journal of Monetary Economics, Elsevier, Elsevier, vol. 19(3), pages 349-376, May.
  6. Smith, Bruce D, 1994. "Efficiency and Determinacy of Equilibrium under Inflation Targeting," Economic Theory, Springer, Springer, vol. 4(3), pages 327-44.
  7. Russell Cooper & Hubert Kempf & Dan Peled, 2005. "Is it is or is it ain't my obligation? Regional debt in a fiscal federation," Working Papers, Federal Reserve Bank of Dallas 0507, Federal Reserve Bank of Dallas.
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Cited by:
  1. Konon, Alexander, 2012. "Direct and Indirect Crisis Effects on International Trade or: Is There a Chance to Employ an Income Stimulus to Stimulate Exports?," MPRA Paper 36363, University Library of Munich, Germany.

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